“As most everyone on the planet knows by now,” writes Z. Christopher Mercer (Mercer Capital), on his blog, Valuation Speaks, Facebook recently went public at $38 per share. At the time of the IPO, Google was trading in the general range of $600 to $615 per share, with an enterprise market capitalization of about $200 billion. Google generated $37.9 billion in revenue during 2011 and earned $12.3 billion net income, for an implied price/earnings ratio of 16.3x. By contrast, Facebook’s 2011 revenues were $3.7 billion and its net income was $1.0 billion. The IPO pricing was at $104 billion, with an implied P/E of 104x. “Has anyone done the math?” Mercer asked, in this first post.
In a second post, Mercer did a little math. He performed a present value analysis, assuming that Facebook could grow at compound annual rates of between 25% and 50% for the next five years and that the shares would enjoy pricing at the price/revenue multiple of about 5x what Google enjoys. With growth rates between 30% and 40%, the analysis yielded prices ranging from $13.65 to $21.61 per share for a range of discount rates from 11% to 13%, as illustrated by this table:
Mercer did a little more math in his third and latest post. After factoring in the most recent analysts’ reports on the Facebook IPO, he once again used Google’s revenues, implied earnings ratios, and growth rates to show that Facebook would have to grow at 42% per year for the next six years to reach investor expectations. “I’ll ask the question I asked in the first post once again,” Mercer says: “Did anyone do the math?”